Identifying volume divergence can be hard on a new trader. However, as I showed the Annual Members on Saturday, using the Trend SR indicator and simply connecting the pink dots allows traders to visually identify volume divergence easier.
Identifying Volume Divergence – Parallel vs Non-parallel Lines
For example, on the Euro Currency Future this morning. Connecting the pink dots that identify the new lows, line A shows parallel lines. This indicates that both price and volume are moving in harmony with each other. New lows in price results in new lows in volume using the Directional Volume indicator. Of course, if using typical volume indicators, traders would not see that sellers were increasing.
Then line B shows that as price is making new lows, volume is not. This forms a non-parallel line (actually a V formation) and easily identifies that price and volume are not moving in harmony. This immediately tells the trader a retracement is likely to occur. When price and volume are not in harmony, then price will typically retrace as it is looking for an area of resistance (or support as the case may be). During the testing of these retracement areas, buyers will either abandon the move or increase in strength. These areas are where traders can enter with the lowest risk because they are entering at areas that are providing either support or resistance.[/sociallocker]
Of course, the last volume bar on the chart shows that buyers stepped in on the low. Does the price bar confirm this information? Yes, because the close is greater than the open. Again, harmony between what volume is telling you and what the price bar is telling you. Of course, with the ADX in an oversold area, this gives additional confirmation that a retracement is likely to occur, as well.
Now the only task is waiting to see the results of the test for buyers to determine if price will continue down or reverse.